Balancing market rent while keeping great tenants - January 2019
As a landlord, the best approach to managing your investment property is to find a tenant who seems respectable, responsible and considerate. The goal is to find someone who’s most likely to pay their rent on time, every time and treat your holding with the respect of a homeowner.
Once you’ve got them in, it’s easy, isn’t it? Every six months or so, you just up the rent because that’s what is expected. So long as you move with the market, everything will be fine. Surely this is a black-and-white business decision?
Not necessarily. Let’s look at what can be the real cost of asking for an extra $15 each week.
Picture this. Your current tenants give notice that they’re moving on. They figure they can find a better deal elsewhere, on par with the $500 a week you’ve been charging. Despite having loved living in your place, circumstances have changed and the additional $15 a week doesn’t feel right – it’s time to move on.
And so, they go, and it takes your managing agent two weeks to find someone else to move in.
That fortnight’s vacancy means, you’re down $1000 on the year. You’ve wiped out most of that last $15 rent increase, lost a good tenant and had to start all over again with a new one.
Not to mention the marketing and listing fee your agent charges you for the newbies moving in.
So, isn’t the better approach to value a good tenant over a bit of extra cash? Isn’t there some added value rental premium attached to retaining a good tenant?
Let’s have a look.
A tough time
The market has been a bit challenging for investors of late.
Not only have owners had to contend with the reality of softening property prices, but in some locations an oversupply of units has left landlords feeling the rental pinch.
Supply is up and it’s resulting in average rent reductions across suburbs in Sydney, Brisbane and Melbourne. Rental stock on the market is also taking longer to lease, with vacancies in Sydney, in particular, rising.
It’s a landlord’s nightmare – an investment not just going for less but sitting empty for longer while potential tenants take their time looking at the many options they have available.
It’s more critical now than it has been in a long time to have a good, stable tenant in place to ensure consistency in your income.
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Three types of tenants
The tenants that pass through an investment’s front door fall, very broadly, into one of three camps.
The first is the blink-and-you’ll-miss-them tenants. They usually don’t give too much grief and probably never get in touch with their real estate agent to ask for anything. They probably pay on time and they’re neat and tidy.
But they come and then they go again. Just as you’ve paid back the outlay of marketing and signing up a new tenant, they’re off to the next place.
The average tenure of the person renting your investment property shouldn’t be just 12 months. That’s too high of a turnover and too much stress for all involved.
The second type of tenant is the nester. They find a place they want to call their home and make themselves comfortable. They love your investment property and they pay on time. They’re in touch with the real estate agent from time to time, but in a reasonable way – to raise maintenance issues and perhaps make fair requests.
Unlike the transient type, they stay put. They’ve found somewhere to live and aren’t keen to move on any time soon.
The third is the tenant from hell. They’re demanding. They’re late with the rent. They make a pile of excuses and they whinge about everything. They’re messy and inconsiderate and they don’t view this as a home, but rather somewhere to crash. They won’t be around long, and chances are, they’ll leave a disaster zone when they move on.
Here’s the easiest pop-quiz you’ll ever take – which one do you think is the ideal tenant?
Being nice pays dividends
Of the three tenant types you might encounter as a landlord, your goal should be to find and keep the second kind.
They’re steady and stable. They’re reliable and respectful. They’re an asset worth retaining.
If that means holding back on rent increases – especially in softer rental markets – then it’s a wise return on investment.
Maintaining a rental price should be a matter of strategy, not an opportunity to try and profiteer wherever possible. The priority should be on stability, particularly in an unstable market, and the person paying your income is your best bet of securing that consistency.
If they’re a great tenant, consider rewarding their effort with a marginal discount. Make them feel appreciated. Don’t hike up the rent just because you can. Think long-term – which should be how you approach investment anyway.
Shaving a little bit off your rental income, or foregoing an increase, will pay off in the long run.
Money talks, it’s true. And everyone likes saving a bit of cash where they can, but keeping a good tenant has a value that shouldn’t be discounted.
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Not just about savings
A good tenant will welcome a lower cost rental, there’s no doubt about it. Cost of living pressures are intense, so being able to save on their weekly living expenses will come as a relief.
But keeping a great tenant isn’t just about reducing the rent. It’s about being a great landlord too.
Respond to maintenance issues in a timely and considerate manner. And be proactive. Don’t wait for things to break and disrupt your tenant’s life. Keep on top of your holding.
The little stuff adds up, like appliances maintained in good working order and cabinetry that opens and closes with ease. Make sure your property manager’s regular inspection make note of those items needing a little attention.
Don’t be a Scrooge either. If someone makes a reasonable request, be open to it. You might be able to come to some sort of arrangement – a nominal increase in their rent in exchange for an addition to the property that they’d really appreciate.
And finally, if you’re happy with them as tenants, tell them! Everyone likes to be appreciated.
Good tenants make for great investments, but it’s a two-way street. Be an excellent landlord and the benefits will flow.
Most of all, learn to rely on your professional advisers so you can read the rental market and make smart decisions when your next lease comes up for renewal.